CP EXIT ARRIVES EARLY FOR HARRISON

Planning to pursue options at other railways

TORONTO • It appears that larger-than-life railroad executive Hunter Harrison isn’t quite ready to head back to his horse farm. Canadian Pacific

Railway Ltd. announced Wednesday that Harrison, 72, will step down immediately.

He had originally planned to retire in July, but now intends to “pursue opportunities involving other Class 1 railroads,” CP said, using the industry term to refer to the largest North American railways by revenue. Shares of Florida-based

CSX Corp., which rebuffed CP’s merger attempts in 2014, jumped more than seven per cent in afterhours trading on speculation that it might be the next beneficiary of Harrison’s legendary ability to turn underperforming railroads into models of operational efficiency.

“Let the conjecture begin,” RBC analyst Walter Spracklin wrote in a research note. “The key question will be what level of ‘opportunity’ the press release is referencing and which railroads are going to be the focus of Mr. Harrison’s attention.” Spracklin pointed out that CSX chief executive Michael Ward is planning to retire soon, but the company made no mention of its succession plans in its fourth-quarter earnings call earlier Wednesday.

On CP’s own fourth-quarter earnings call, incoming CEO Keith Creel and Chairman Andrew Reardon refused to answer questions about Harrison’s departure, saying more details will be released in securities filings in the coming days.

Under the terms of the separation agreement, CP has agreed to a “limited waiver” of Harrison’s non-compete obligations, it said. Harrison has agreed to give up all benefits from CP, including his pension, and will hand over all his vested and unvested stock options. The total value of those benefits and awards is about $118 million.

“Leaving is bittersweet,” Harrison said in a statement. “I have had a wonderful experience and depart with many friends and with full confidence in Keith’s ability to build on the great success we have enjoyed.”

Harrison tried and failed to retire once before when he left Canadian National Railway Co. in 2009. He was brought out of his brief retirement at his horse farm in Connecticut by activist investor Bill Ackman, who tapped him to lead CP following his successful proxy battle.

Reardon expressed confidence in Creel, who has worked under Harrison for more than two decades.

“I’ve been in this industry for 40 years and I have never seen such a textbook case of mentoring and leadership development from Hunter to Keith and now from Keith to his team,” Reardon said on the earnings call. “The fact is, I’ve been fortunate to serve on the CP board alongside the two most talented railroaders of their generations and perhaps in the history of the industry.”

Creel said there will be little difference between his leadership style and Harrison’s. “He’s taught us well. We know the fundamentals, we clearly understand how we work and why and how we sustain our success and you can expect more of the same,” Creel said. “I’ve learned a lot from that gentleman over the years and we know how to run this company and we’re going to make money for our shareholders.”

CP reported fourth-quarter net profit of $384 million, up 20 per cent from a year earlier. Adjusted earnings per share came in at $3.04, below the $3.12 expected by analysts, while revenue fell three per cent to $1.64 billion.

The company’s operating ratio — a key measure of railroad efficiency, where a lower number is better — fell to a record quarterly low of 56.2 per cent despite a three per cent decline in volumes.